02.27.14

Today the H-block auction finally came to a close, after taking longer than many expected to reach the reserve price of $1.564B. Its clear that DISH won virtually all of the licenses, since it was able to select a sequence of bids to exactly match the reserve price.

However, DISH has also faced unexpectedly prolonged opposition from one other bidder who kept bidding on one or two small licenses (and switching around to find the relatively cheaper licenses) for several days in an attempt to secure a license that DISH might buy out later on. The competitor seems to have had only about 60,000 bidding units of eligibility yesterday and more than likely ended up winning one or two small licenses for a couple of million dollars total (a price of about $0.30 per MHzPOP). Stopping at the reserve price and being prepared to buy out the competitor later on (for say $10M-$20M) certainly made more sense for DISH than continuing to play Whac-a-Mole and bidding up licenses across the board to win all of the licenses at a much higher price.

So now the question is whether we will see DISH announce some sort of deal to put its spectrum to use in the near future. Ergen has ruled out bidding against Sprint for T-Mobile, but that doesn’t mean DISH wouldn’t oppose such a bid at the FCC and DoJ. Indeed, if Sprint decided to pay T-Mobile a break fee mainly in spectrum, which would almost certainly be in the 2.5GHz Clearwire band, DISH would have a big incentive to try and block Sprint’s bid before later engineering a lower priced deal with T-Mobile. On the other hand, DISH’s H-block win now gives Sprint more incentive to include DISH in any deal with T-Mobile (most likely joining with DISH to roll out a competitive fixed broadband wireless solution using DISH’s satellite TV antennas while perhaps leasing the H-block from DISH).

However, if DISH is left out in the cold by Sprint, Ergen could eventually turn his attention to a merger with DirecTV. Some thought that the asset swap between DISH and EchoStar that was announced last week was intended to “pave the way for a merger with DirecTV”. However, I think that misunderstands what the next move is going to be and that this deal was intended to set EchoStar not DISH up for a near term transaction, by giving it more satellites plus a guaranteed (and incentivized) satellite broadband customer for the next 10 years, while removing some of the risk associated with consumer retail sales (which is less attractive to an FSS operator). That deal is highly likely to be with Telesat and/or Loral, which recently was reported to be up for sale and has been looked at by Ergen in the past. In contrast, any deal with DirecTV is more likely to be months away.

In addition to all of this action for DISH and Echostar, Ergen was also basically told by the judge in the LightSquared bankruptcy case on that he (i.e. SPSO) needs to come up with an alternative plan for LightSquared before the confirmation hearing on March 17, because she is “not going to say today ‘lights out on this company’” by rejecting the current plan from the company, even though SPSO has “strong” arguments that the plan is infeasible.

So now we appear poised to see one or more transactions from DISH, EchoStar and/or SPSO in the next few weeks. I would estimate that the probability of a LightSquared offer from SPSO is at least 90%, and the likelihood of a Telesat/Loral deal with EchoStar is perhaps 60%-70%, but the chance of a (much more significant) Sprint deal with DISH is no more than 30%. Nevertheless, that will still be plenty to keep Charlie busy for the time being.

02.19.14

LightSquared’s Valentine’s Day message to Charlie Ergen was neither short nor sweet, with the filing of an 883 page long third amended bankruptcy plan on Friday night. The new plan no longer requires FCC approval of LightSquared’s license modification application before emergence, because as I pointed out last month, the FCC’s intervention had made LightSquared’s previous contingent plan untenable.

LightSquared has instead delayed the assumed timetable for FCC approval until December 31, 2015, and at this stage plans to raise enough money to carry the company through the first quarter of 2016. That will include a new $1.65B DIP facility, which will be sufficient to pay off all of the existing creditors of LightSquared (including accrued interest) with the exception of Ergen/SPSO. The new DIP facility would be expected to close at the end of March 2014, so the creditors wouldn’t even have to wait for the company to emerge from bankruptcy.

Because of the lack of FCC approvals, LightSquared can’t raise enough new money to pay off all of its debts, and so the plan involves subordinating Ergen/SPSO’s debt in the form of a third lien 7 year note, paying PIK interest at 12%. Ergen’s debt would rank behind a $1B first lien exit facility (which could be increased by another $500M after FCC approval of the license modification) and a second lien LP facility which would include $930M from the planned $1.65B DIP financing.

Of course, there is little incentive for Ergen to agree to this proposal, and even if the judge decides to approve the plan, including the new DIP financing, I would expect that LightSquared’s emergence from bankruptcy could be delayed while appeals take place (the current expectation is for the plan to become effective on or before October 31, 2014).

Importantly, LightSquared won’t have to make any payments to Inmarsat until it emerges from bankruptcy, and the plan contemplates that “the Inmarsat Agreement shall have been amended in a manner acceptable to the Lenders, which amendment shall include an extension of the period for election of spectrum and corresponding deferral of payments in respect thereof acceptable to the Lenders.”

However, LightSquared’s attempts to subordinate SPSO’s debt holdings are not based solely on the pending adversary proceeding, in which Ergen and Falcone testified in January. Instead LightSquared is seeking to designate SPSO’s vote, based on the DBSD precedent, which of course also involved DISH (disclosure: I testified as an expert in that case).

That Second Circuit ruling was based on deterring “attempts to ‘obtain a blocking position’ and thereby ‘control the bankruptcy process for [a] potentially strategic asset’ (as DISH’s own internal documents stated)” although it “[left] for another day the situation in which a preexisting creditor votes with strategic intentions” (which SPSO might be, because at least some of its purchases were made before LightSquared filed for bankruptcy). In addition, DBSD doesn’t address whether a debtor is able to divide one class of its debt into two so that there is only one creditor in a subclass, who can be treated differently from the rest of the class once that creditor’s vote is designated. Importantly, if the vote of the sole creditor in a class is designated, then (under DBSD) there then is no need to provide that creditor with “the indubitable equivalent” of its claims, as would otherwise be required under the “(more arduous) cram-down standards of §1129(b)”.

That’s why LightSquared is presenting allegations in the new bankruptcy plan which attempt to match the DBSD findings as closely as possible, stating that:

“LightSquared and the Supporting Parties believe that Ergen Entities’ inequitable scheme – which was outlined to the DISH board in a May 2, 2013 presentation – began when SPSO, which is controlled by Ergen, acquired LightSquared LP secured bank debt and preferred stock to influence these Chapter 11 Cases. The parties further believe that the evidence at trial contradicted the Ergen Entities’ contention that SPSO purchased LightSquared LP’s debt solely as an investment. Rather, the evidence demonstrated that SPSO’s acquisition was a scheme to control LightSquared’s bankruptcy process and to facilitate a spectrum acquisition option by DISH. Among other things, Ergen’s and Stephen Ketchum’s testimony demonstrated that (a) the Ergen Entities paid a third percent (30%) premium on what Ergen believed the debt was worth in order to obtain a blocking position, (b) obtaining a blocking position was an early objective, and (c) the Ergen Entities’ equated the blocking position with facilitating the acquisition of LightSquared’s spectrum assets.

LightSquared and the Supporting Parties further believe that, in the next phase of the Ergen Entities’ concerted scheme, shortly after SPSO had acquired a blocking position, Ergen caused LBAC to make a bid for substantially all of LightSquared LP’s assets, a bid that Ergen designed to be particularly attractive to LightSquared LP’s other secured lenders by consisting of an amount sufficient to pay LightSquared LP’s secured debt in full, and conditioning payment only on Hart-Scott-Rodino approval. The Ergen Entities, however, were already contemplating ways in which they could pay less than the agreed purchase price for the LightSquared LP assets if no other bids materialized. This tactic – reverting at a later date with an altogether different bid – was also outlined in the May 2, 2013 presentation.”

So now the question is whether Judge Chapman will go along with LightSquared’s plan, agree to treat SPSO’s debt as a separate class and designate SPSO’s vote. One argument that SPSO is likely to make is that it should not be in a separate class from other LP debtholders (in which case designation of its vote would become irrelevant, because the LP debtholders are being paid in full in cash). And of course, we will certainly hear a very different explanation of the developments described above.

I also wonder if Ergen will make an offer to purchase LightSquared through SPSO in an attempt to provide an alternative for the judge, perhaps at a price of roughly $2B as he tentatively offered last summer (although a lower offer of say $1.7B, or face value for the debt, might be plausible in view of the regulatory risk that the FCC introduced with its intervention last month). Remember that Ergen testified last month that he had considered bidding himself, by borrowing against his stake in EchoStar.

However, an offer by DISH seems unlikely, in view of DISH’s focus on other opportunities, and the fact that it would complicate Ergen’s defense against LightSquared’s allegations of an “inequitable scheme…to pay less than the agreed purchase price”. Indeed the defense would be stronger if DISH entered an alternative deal, providing the judge with a coherent rationale for the abandonment of its LightSquared bid.

In summary, it looks like it will be at least another month before there is any certainty about what happens to LightSquared. In the meantime, the H-block auction has been fairly quiet, with only a very slow rise in the total bids (to reach just below $1.5B at the end of Round 96 today). This afternoon, the pattern of new bids has changed somewhat, suggesting that DISH is mostly bidding against itself right now, and its remaining opponent(s) may have as little as a few hundred thousand bidding units of eligibility left. Once the auction is complete (which may finish on Friday or drag on until early next week) then I expect we’ll hear a lot more speculation about what else DISH has in mind and perhaps even a deal ahead of the confirmation hearing on LightSquared’s latest plan.

02.10.14

Last week, at its partner conference, Iridium announced the launch of its new GO! product, which will provide the ability to relay calls and data to and from a smartphone via WiFi, at a reported retail cost of $700-$800. Iridium is looking to boost its revenues from handheld data (i.e. email, texting, etc.) which to date have been fairly modest in the satellite phone market, and will offer lower cost bundles of data minutes, including unlimited packages for intensive users. Indeed, one of the likely use cases is on yachts and fishing boats, which don’t need a full blown high speed data solution. This is slightly different to Thuraya’s SatSleeve, which is more likely to stimulate incremental voice usage, because the SatSleeve is physically attached to an iPhone or Samsung S3/S4 phone and so is easier to use for voice communications.

Globalstar also threw its hat in the ring, pre-empting Iridium’s announcement with the Sat-Fi, which is “expected to receive final FCC certification…during the second quarter of 2014, with shipments starting shortly thereafter.” Globalstar has had a “puck-like” device on its roadmap for several years, but has always wrestled with whether it is worthwhile to invest in product development for a product based on its existing Qualcomm air interface, with a potentially limited lifespan, or if it is better to wait for the new Hughes chipsets in 2015, which will offer improved data capabilities and will be supported throughout the lifetime of the second generation constellation.

Its therefore interesting to note that (according to my sources) the Sat-Fi will be based on the Qualcomm GSP-1720 voice and data module rather than the Hughes chipset. This suggests that Globalstar either perceives a large near term opportunity, which would justify making the investment now, or was particularly focused on spoiling Iridium’s announcement. Iridium clearly thinks it was the latter, and doesn’t believe that the Sat-Fi is actually “real”.

Globalstar has kept details of the Sat-Fi pretty quiet (although it filed a patent application on some aspects of the concept two years ago), and none of the MSS distributors I’ve spoken to seems to know much about the size, price or market positioning of the Sat-Fi device. However, despite Globalstar’s greater focus on the consumer market, it does not appear likely that Sat-Fi would sell in significantly higher volumes than Globalstar’s existing satellite phones, assuming a comparable price point. Indeed estimates that there might be 150K hotspots in use by 2022 would represent only 10%-20% of the expected satellite phone market in that timeframe.

I’m sure this will be make for a fascinating discussion during the MSS CEO panel at Satellite 2014 and perhaps even a return to some of the contentious debates of prior years. Ironically, the barbs being thrown around over the GO! and Sat-Fi don’t fully reflect the competitive landscape in the MSS industry, with Iridium and Globalstar focusing to a significant degree on different distribution strategies, target customers, and (to some extent) geographies.

In that context, both could be successful in different parts of the market, which would make this much like prior arguments over Inmarsat’s ISatPhone Pro and its supposed advantages over Iridium (reflected in the Gabby Wonderland video produced by Inmarsat’s marketing agency in 2010). In that case Inmarsat’s initial belief was that the ISatPhone Pro would hurt Iridium’s satellite phone business significantly, but in reality Iridium continued to dominate the higher end of the MSS handheld market (and sold more satellite phones than Inmarsat at much higher equipment margins), while Inmarsat expanded the low end of market instead.